ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
CRAIG R. FINLAYSON STEVE CARTER
SWIFT & FINLAYSON ATTORNEY GENERAL OF INDIANA
Fort Wayne, IN Indianapolis, IN
VINCENT S. MIRKOV
DEPUTY ATTORNEY GENERAL
IN THE INDIANA TAX COURT _____________________________________________________________________
INTERSTATE WAREHOUSING, INC., ) ) Petitioner, ) ) v. ) Cause No. 49T10-9806-TA-71 ) INDIANA DEPARTMENT OF ) STATE REVENUE, ) ) Respondent. ) ______________________________________________________________________
January 9, 2002
Ind. Code § 6-2.5-5-5.1(b). The Department argues that Interstate is not entitled
to the exemption because Interstate does not engage in the production or processing
of other tangible personal property and is merely providing a service.
Production is broadly defined and focuses on the creation of a marketable good. Mid-America Energy, 681 N.E.2d at 262. See also Indiana Dept of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 524-25 (Ind. 1983) (finding production occurred where trucks used to transport crude stone from the quarry to the crusher because trucks were essential to creation of new marketable good, i.e., transformation of crude stone to aggregate stone); Indianapolis Fruit Co. v. Dept of State Revenue, 691 N.E.2d 1379, 1385 (Ind. Tax Ct. 1998) (finding production where taxpayer actively transformed unmarketable bananas into marketable ones); Harlan Sprague Dawley, Inc. v. Ind. Dept of State Revenue, 605 N.E.2d 1222, 1223-24, 1228 (Ind. Tax Ct. 1992) (finding production occurred where rats were bred in sterile and quarantined environment to create a new offspring with particularized desired characteristics); cf. Mechanics Laundry & Supply, Inc. v. Ind. Dept of State Revenue, 650 N.E.2d 1223, 1228-29, 1231 (Ind. Tax Ct. 1995) (finding no production occurred because taxpayers act of cleaning a textile did not create a new marketable good but merely returned the textile to its original state). Production can occur through manufacturing, processing, or any other activity listed in the exemption. Mid-America Energy, 681 N.E.2d at 262 (citing Cave Stone, 457 N.E.2d at 524). However, when a good is not produced and a service is provided, it is proper to deny the exemption. Mid-America Energy, 681 N.E.2d at 263.
In Mid-America Energy Resources, this Court found that Mid-America was entitled to the consumption exemption on chemicals and steam service it purchased because its operation of chilling and treating water for the purpose of conditioning air in its customers buildings constituted production of other tangible personal property. Id. at 264-65. Mid-America used compressors, a refrigerant condenser, expansion valves, and an evaporator to remove heat, a form of energy, from water to chill it to 40°. Id. at 260, 263. The chilled water was then pumped through a close loop system, where it was chemically treated, and used by Mid-Americas customers to cool the air in their buildings. Id. When the water reached a temperature of 52°, it was returned to Mid-America through the same closed loop system. Id. at 260. Mid-America then re-chilled the water and sent it back out to its customers buildings. Id. This Court found that the process of chilling the water created a significant change in the properties of the water and made it capable of cooling air in buildings. Id. at 263-64. The Court also found that Mid-Americas operation create[d] a new and marketable good, or in the language of the statute, produce[d] other tangible personal property. Id. at 263. Thus, because Mid-America was involved in the direct production of other tangible personal property, it was entitled to the consumption exemption. Id. at 263-64.
Just like Mid-America, Interstate is involved in the direct production of other tangible personal property in its operation of producing conditioned air. Interstate uses compressors and condensers to remove heat, a form of energy, from ammonia to cool it to 20°. The conversion of gas ammonia to a chilled liquid ammonia transforms the ammonia so that it is capable of cooling the storage units of Interstates customers. The chilled ammonia is circulated through a closed loop cooling distribution system to chill the air in the storage rooms where Interstates customers kept their perishable food items. When the temperature of the chilled refrigerant ammonia rises to 0°, it is returned through the same closed loop cooling distribution system to the central refrigeration system. Upon receiving the warmed ammonia, Interstate re-chills it and sends it back through the closed loop system to its customers storage areas.
Analogous to Mid-America, where the process of chilling water created a significant change in the properties of the water and made it capable of cooling air in its customers buildings, Interstates processing of chilling ammonia created a significant change in the ammonia and made it capable of cooling air in its customers storage units. See Id. at 263. The chilling of the ammonia placed it in a form substantially different from that in which it was acquired. See Indianapolis Fruit, 691 N.E.2d at 1385 (citing Ind. Admin. Code tit. 45, r. 2.2-5-10(k)). Interstates operation created a new and marketable good. See Mid-America, 681 N.E.2d at 263. Because Interstate consumed electricity in the direct production of other tangible personal property, it is entitled to the consumption exemption.
Finally, the Departments attempt to analogize this case to Mechanics Laundry and Indianapolis Fruit is without merit. In those cases, the taxpayers sought the equipment exemption for equipment used to act upon other goods. In Mechanics Laundry, the taxpayer sought the exemption for equipment used to launder soiled textiles. Mechanics Laundry, 650 N.E.2d at 1227. This Court found that laundering soiled textiles did not produce other tangible personal property. Id. at 1229. In [Mechanics Laundry], this Court distinguished the production of a marketable good from the perpetuation of a previously manufactured good. Mid-America, 681 N.E.2d at 263 (citing Mechanics Laundry, 650 N.E.2d at 1230).
In Indianapolis Fruit, the taxpayer sought the exemption for equipment used to ripen bananas and tomatoes. Indianapolis Fruit, 691 N.E.2d at 1382. In that case, the taxpayer actively ripened the bananas by introducing ethylene gas into the banana ripening booth. Id. at 1385-86. The taxpayer allowed the tomatoes to ripen by merely placing them in a tomato processing unit. Id. at 1382. This Court found that the taxpayer was entitled to the equipment exemption for the bananas because the taxpayer had physically and chemically transformed the bananas from unmarketable bananas to marketable ones. Id. at 1381, 1385. The Court, however, found that the taxpayers tomato ripening process did not constitute production because the taxpayer did not trigger the ripening process but merely passively allowed it to occur. Id. at 1385-86
Here, the Department incorrectly focuses on whether there is a transformation of the food stored in Interstates customers refrigerated storage areas. Interstate is not seeking an exemption based upon a claim that the other tangible personal property it produces or transforms is the frozen food in its customers storage areas. Interstate is seeking a consumption exemption based on the electricity it consumed in producing chilled ammonia that was used to condition the air in its customers storage areas. Therefore, the Departments argument is meritless.